The Price of a Free Economy

Almost two and a half years ago, we wrote an article on the economics of free. Aside from being a stunning reminder that we’ve been ClickZ columnists for that long, that article — at least its topic — deserves another look.

In case you don’t want to read the archived article, here’s a refresher. We discussed how the Internet seemed like a huge giveaway. From free email accounts to free online content that you typically have to pay for in other media (particularly newspapers and magazines).

Giving stuff away as a business model seemed completely counterintuitive to our capitalist tendencies. At the time the academic and research roots of the Internet were meeting up with the commercial interests and possibilities. The result was a culture clash of sorts: in this corner, the free sharing of information and resources; in the opposite corner, the 300-pound gorilla of free-market enterprise and people’s drive to make a buck (or a million).

At the time we heralded the economic models of the Internet: Openness and decentralization were prospering over private systems. The sense of community could live with the sense of prosperity.

That is, until things got ugly.

Too Much Freedom?

Companies that were at their peak just over a year ago have taken a beating in the stock market. The dot-coms that were pioneering new ways of communicating, creating new relationships with consumers, and essentially giving it away are suffering.

Financial analysts and others among the talkaloti are looking for people and behaviors to blame for the sudden downturn. Shaky business models. Young CEOs whose first priority was to create “a fun place to work” instead of a “profitable company.” There were a lot of big promises and little delivery. Or so they say.

Most everyone agrees that business models based purely on advertising revenue are taking the biggest hit of all. Even those consistently among the top-rated sites in terms of traffic are suffering under the pressure.

One analyst suggested that customers of free sites such as Yahoo are actually liabilities instead of assets. The more popular a site — that is, the more traffic it gets and the more services it delivers for free — the more infrastructure you need, the more people you need to keep it going, and the more you sink backward. It’s time those freeloading consumers stepped up and started paying for their stuff! Or so they say.

What Revolution?

Perhaps underlying all this is the staggering lack of imagination. For all the hoopla about a communications revolution, we haven’t moved very far. As soon as the Web went from a free online community of academics to a potential cash cow, it went through a mental degouser (the electric magnet used by broadcasters to bulk-erase videotapes).

The Web became little more than TV on steroids. Instead of really changing how businesses interact with their consumers, the Web has become a testing ground for marketers. Remember that TV isn’t about programming; it’s about keeping your attention (or keeping you in a semi-comatose state) long enough to get you from one commercial break to another.

In a recent interview on public radio’s Market Watch, Bob Foster, an associate professor at the Anderson School at UCLA, said companies such as eBay and AOL, which have fee-based services rather than free services with advertising, are more stable and will likely better weather the difficult times.

What’s New Is Old

The new economy is looking a lot like the old economy: Success is based on diversification.

All the theory that we’ve talked about in the last couple of years — how the Internet is about content, commerce, and communities — has an opportunity to be tested now. It’s in the tough times that we learn what really works.

As the saying goes, “A learning experience is a euphemism for saying you didn’t get what you wanted.”

Marketers create personas to better understand their target audience and what it looks like. If marketers can understand potential buyer behaviors, and where they spend their time online, then content can be targeted more effectively.